Cyclical analysis of the European economy for the summer of 2016: no recovery anywhere. Part 1

Incorrect GDP calculations

The difference between what a knowledgeable observer can deduce from data concerning the European economy and what the official statistics office makes of it is becoming increasingly grotesque. Last week, the Federal Statistical Office reported a growth of German GDP of 0.4 percent in the second quarter of 2016 compared to the previous quarter (see here). Eurostat presents – using the German figure, of course – a 0.3% growth for the euro area as a preliminary estimate (see here).

We have said this many times already and unfortunately we need to repeat it: these figures are not worth the paper on which they are printed. Scandalously, statisticians use a lot of imagination to produce what politicians want to hear. It is getting worse all the time. The media show no appetite for critical analysis or insight. The mainstream scientific community eagerly picks up these figures and jubilantly trumpets the great news around the world. Our longstanding demand to the office, the total disclosure of the calculation of the figures in the national accounts is more relevant than ever.

In Germany, all the hard data (i.e. those that can be consulted in the short term) point towards a decrease in production in the second quarter compared to the first one. Production in the manufacturing industry (this is construction plus industry) is in the second quarter at an index level of 109.0 to 110.1 (2010 = 100). Retail, which contributes to production and is at the same time the most important indicator of demand, registered a turnover of 106.1 to 106.5 in the first quarter (all figures are from the Deutsche Bundesbank, see here).

How wrong the evaluations of the Federal Statistical Office are can be understood immediately when it is seen that they practically only reckon with the demand side of the economy, about which we, at short notice, know virtually nothing. The press release states that:

“Positive impulses came in comparison to the previous quarter (adjusted for price, seasonally and for calendar) in particular from net exports. According to preliminary calculations, exports rose compared to the first quarter of 2016, while imports declined slightly. Consumer spending and government consumption grew and is supporting growth. However, growth was hampered by weak gross investment. Especially, there was less investment in equipment and in buildings than in the strong first quarter.”

The problem is that everything that Germany exports has to be produced. This applies to exports as well as to consumption. If manufacturing output is declining, the increasing volume of products that have been sold have to come from heaven.

If the main indicator for consumption is declining, one wonders how the statisticians can make the argument that consumer spending supports growth. The only remaining loophole, and it is indeed being addressed, are imports. If in a declining economy, imports decrease and the current account balance (net exports) rises as a result, it is possible that even with declining production GDP still increases because less of what was produced is being withdrawn from consumption for imports.

Such pitiful result would mean that even the first sentence of the Federal Statistical Office’s press release “The German economy continues to grow” is misleading. Because then, the economy is not really growing at all. It is a matter of a statistical calculation showing a positive result because declining production is evened out by less imports and somewhat higher consumption of domestic goods. The point of the Federal Office’s figures is the all-important political message behind it: we are doing well.

The German economy stagnates

We are not doing well. The concrete results of the statistical surveys of the past few months prove that Germany remains in stagnation mode. New orders in industry show no recovery or growth (see figure 1). Demand for German industrial products remains at the level reached in 2014, after it was also realised in 2011. This applies to both foreign and domestic demand.

Figure 1.

The Ifo business climate index, which covers more than just industry (it incorporates trade and construction) shows that there is no growth in the volume of orders (see figure 2) (the index can be found here). This juxtaposition also means that no growth is to be expected as long as the volume of orders in industry remains flat.

Figure 2.

Several commentators optimistically refer to the German construction sector, where, indeed, orders are up. But if and when exactly construction is really up on the basis of indicators as new orders and building permits is not an easy question to answer. So far, at least, there seems to be no upswing and the Ifo index suggests that business expectation in construction, although it evaluates the current situation as positive, remain diminutive.

New substantial impulses from abroad are also not to be expected. The divide of orders in European and non- European countries shows no upward dynamic in either (see figure 3). The upturn in orders from the non-eurozone, which started in 2014, is over and there are no new impulses from the euro zone either. As mentioned above, Germany can only claim positive effects on foreign trade because imports decrease. The real European scandal is that Germany is still waiting for such impulses to come from abroad, instead of producing them itself and giving impetus to the European economy.

Figure 3.

You can read in the second part of how European industry has developed in the second quarter. The third part will present other relevant indicators for Europe and ask which consequences need to be drawn from this bad situation.